Column: Taxes, Taxes & More Taxes & Tolls & Fees
By Mark Pruner
The stock market is up, unemployment is down, and interest rates are lower so why are sales and contracts in Greenwich down while inventory is up from last year.
Now part of it could be that people are finally seeing the result of the 2017 Tax Cut and Jobs Act. This seems a little unlikely as we could see the effects of the tax cut move through our market last year from January to September, by October most of the apparent changes to the Greenwich real estate market had worked their way out and we were back to a more normal market.
Amazingly, our sales were up in 2018, while in New York City and Westchester County sales were down. In Greenwich sales from $800,000 to $1,000,000 jumped an incredible 60% in 2018 compared to 2017. For once, we had enough inventory for the people who wanted to buy in Greenwich in that price range.
It appears that the TCJA sent more people into Greenwich than decided to move out. What then is causing the drop in sales and contracts in Greenwich in the first quarter of 2109. A good bet is it is the surfeit of bills designed to extract more money from Connecticut’s residents to solve what some say is a $1.5 billion budget hole. Let’s take a look at some of these bills and how they might affect the Greenwich real estate market.
Statewide Property Tax – SB 431 – This bill is proposed by State Senate President Martin Looney of New Haven who is doing a masterful job of coming up with ways to benefit his constituents, but it’s not at all clear it will work. As with all new types of tax laws, the initial request is modest; an increase of 1 mill ($1 per $1000 of assessed value) for all real property in the state. The money raised would then go to those towns that have high mill rates.
In Greenwich that would mean that taxes on our average house sale last year of $2.4 million would continue to generate $19,943 for the Town of Greenwich, but the homeowner of the “average” house in Greenwich would also pay $1,680 additional in a new state property tax. These funds would be used to lower the property taxes in New Haven and other high tax cities in Connecticut.
There are several problems with this proposed new tax. Since it makes Greenwich houses more expensive to own, it will result in lower house values in Greenwich (and higher values for Senator Looney’s constituents in New Haven.) Our property taxes will go up 8.4% the first year the first year plus the town’s 2019 increase in the mill rate, likely in the 2.5% to 3 percent range. For round number purposes let’s say 2.6%, which means Greenwich taxes would go up 11% in the first year.
Most homeowners in Greenwich are already paying more than the SALT $10,000 tax deduction limitation in combined town property tax and state income tax. As a result, the 11% increase would be paid with after tax dollars. Let’s assume our “average” homeowner of the $2.4 million house is in the 35% tax bracket. To pay the higher taxes they will actually need $3,374 more income to pay the state and increased town taxes or an increase of 17% in property taxes.
To give more relief to his constituents, Senator Looney is also proposing a $50,000 homestead exemption which in New Haven where the average sales price is $267,000 would be a reduction of 19%, while it would only reduce the Greenwich assessment by 2%. Another issue is this bill directly takes money from one town and gives it other towns. At least the highway tax is designed to be invested in infrastructure.
However, the biggest problem by far to me, is that once this statewide property tax is imposed it will never go away and over the next couple of decades will double, triple or even quadruple. Any time a legislature only has to amend one number in a statute to substantially raise revenues, they tend to do so on a “temporary” basis, which generally becomes permanent.
Statewide Car Tax – Another part of Senator Looney’s bill would take away Greenwich’s $9.5 million in revenue from the property tax on automobiles. At the same the mill rate on Greenwich cars would go from 11.4 to an estimated 15 – 19 mills. Once again, the tax revenue would be used to lower taxes in other towns and cities with higher mill rates and would have to be paid with after tax dollars in most cases.
A curious effect of this law would be to discourage more wealthy car collectors from moving to Greenwich. Folks who can afford a dozen, or two dozen, collectible cars usually already pay a lot of state income tax so discouraging these folks is not in the state’s interest.
Conveyance Tax Changes – SB 877 – The conveyance tax increase bill is the classic example of ratcheting up a tax rate to help balance a budget. In this case the conveyance tax paid by the seller would go up from 1.25% to 1.5%, but only for the sale price over $800,000. Interestingly, this bill was also introduced by Senator Looney of New Haven, where only 9 out of 549 houses and condos last year sold for over $800,000.
Broadening Sales Tax on Services – SB 877 – Another part of SB 877 taxes lots of services not previously taxed, whether real estate agents, attorneys, architects, soil scientists or just about every other profession in real estate sales and developments. These new sales taxes will be tacked on at the end of the bill and all of a sudden real estate buying and development just got 6.35% more expensive in Connecticut.
Repeal Estate and Gift Tax – HB 6031 – Now it’s not all bad news for Greenwich. Our newly elected Rep. Stephen Mesker and Senator Bergstein have both introduced bills to phase out (Rep. Mesker) or eliminate the estate tax (Sen. Bergstein). They are two of 15 short one or two sentence bills stating the Connecticut General Statutes should be amended to phase out or eliminate the estate tax. In addition, there are 2 other bills to eliminate just the CT gift tax.
Repealing the gift tax should be a no brainer. We are the only state in the nation with a gift tax. Tax accountants and attorneys love to tell their high-end clients that if you move to Connecticut your estate planning will notch-up another level of difficulty. It discourages more people from moving in and encourages our seniors to move out of state and it doesn’t raise a lot of revenue.
The estate tax generates revenue, but there is a good chance, that like the gift tax it is a net negative. As it encourages high-net worth people to move out of Connecticut. Actually, in many cases they don’t actually move out, they just spend less time here and change their tax situs to a state that is a lot more tax friendly. At these income levels people already have 2 or 3 houses. All they need to is to spend a little more time in their winter house and Connecticut loses lots of tax revenue.
Effect on the Greenwich Real Estate Market – All of the new tax bills as well as the proposal to put tolls in 52 locations on Connecticut roads including not only I-95, but also the Merritt Parkway, are making selling real estate in Greenwich tougher. The price ranges most impacted are from $4 – 10 million. In that price range we only sold 5 houses in the first quarter and we have 135 houses in inventory. We are looking at months of supply ranging from 6 years to 12 years of supply. Now a few sales will make these numbers better but based on contracts and the rate at which new listings are coming on, these numbers aren’t going to be good for months.
In these price ranges people are voting with their feet, in our other price ranges things are looking better. From $1.5 – 4.0 million our contracts show that months of supply are going to be looking better soon. Sales and inventory in the $2 – 3 million range are looking particularly good this year. Also, we always have higher inventory in March and April as our spring listing come on. What we are seeing this year, however, is more inventory in most price ranges and fewer sales and contracts.
The problem for Connecticut is that the people who buy the $4 – 10 million-dollar houses pay a lot of income taxes. Their loss means lots of taxes on lots of lower income household have to be raised. Our legislature needs to take a serious look at the expense side. Whether the money comes from a higher conveyance tax, a state-wide property tax, a much broader sales tax or dozens of tolling stations at the end of the year, we will all have less money in our bank account.
No one says these issues are easy. Promises were made to pay pensions that people relied on. Our poorest and sickest depend on these state programs, but if we can’t keep our high taxpayers, the ultimate reckoning is going to be much worse.
On the good news side, inventory over $10 million is down, albeit only 5 houses out of 30 houses, but our ultra-high end seems to be holding up. As Baron Rothschild said the time to buy is when there is blood in the streets, luckily, it’s not that bad. We are seeing a lot of diffident buyers that are waiting to see what’s going to happen, but if they buy now, they get a better deal and Greenwich will always be Greenwich. Most towns would be ecstatic to have 15 sales over $4 million.
Mark Pruner is an award-winning real estate agent with Berkshire Hathaway. He can be reached at 203-969-7900 and firstname.lastname@example.org